UK government borrowing came in well above the OBR's forecast in July, reflecting the combination of soft activity and higher debt interest payments. With May's fiscal package yet to be reflected in the data and more support for households likely in the winter, borrowing is expected to be substantially higher than the OBR's forecast for fiscal year 2022-2023 as a whole.
But the prognosis for future years looks better, and there's a reasonable chance that the OBR's next set of forecasts will offer the new Prime Minister more headroom against the fiscal mandate. Still, high inflation means nominal spending would need to rise to deliver the same services in real terms.
Martin Beck, chief economic advisor to the EY ITEM Club, says: “Public sector net borrowing (excluding public sector banks) came in at £4.9bn in July. This was £0.8bn less than a year earlier, but £4.7bn higher than the OBR's forecast. However, favourable historical revisions meant the year-to-date performance was better – borrowing of £55bn over the first four months of 2022-2023 was just £3bn higher than the OBR anticipated. Both central government revenues and central government spending have underperformed relative to the OBR's expectations. On the revenues side, this is likely to reflect the slowdown in economic activity in H1 2022, while on the expenditure side, the impact of much higher-than-expected inflation on debt interest payments has been key.
“The EY ITEM Club expects borrowing to remain above the OBR's forecast over the remainder of the fiscal year, given the OBR's projections were published prior to May's £15bn support package for households being announced. Indeed, the scale of the cost-of-living challenges facing households this winter is serious enough that an increase in the scale of government support seems highly likely.
“But with the fiscal mandate judged on a rolling three-year basis, the implications of extra near-term support are negligible. Indeed, there's a good chance that the OBR's next set of projections will judge that the headroom against the mandate has increased, given that their normal rules of thumb suggest that a period of high inflation is likely to leave a bigger permanent boost to revenues than spending. That said, higher inflation means the Government would need to increase nominal spending to deliver the same volume of services it had previously planned, and given pressures on the NHS and calls for more spending on defence, higher expenditure looks likely.”